An annuity gives you a regular, guaranteed income when you retire. You can buy one once you’re 55 (or 57 from April 2028), using money from your pension pot. Depending on the type of annuity you go for and the product options you choose, you can get a guaranteed income that:
- Lasts for the rest of your life
- Rises over the life of your annuity
- Goes to someone else when you die
Once you’ve set up an annuity you can’t make any changes to it.
What does annuity mean?
Once an annuity's up and running you'll start getting regular, guaranteed payments. You agree how much those payments will be when you set up your annuity. Different providers will offer different annuity rates, so it’s always worth shopping around. Our annuity rates article will tell you more.
But the meaning of annuity is more than just financial. Because of those guaranteed payments, the real annuity meaning is often just… peace of mind. In this article we'll be looking at how a lifetime annuity works. You could also consider a fixed-term annuity, which works a bit differently.
Is an annuity a good idea?
As with any financial product, whether or not an annuity is a good idea depends on your personal circumstances and goals. If you’re the right age and looking for a guaranteed income, an annuity could be right for you. But if you want more flexibility it could be better to go for another choice, like drawdown. Our Annuity vs drawdown article compares the two in more detail.
We’ve put together a list of pros and cons for lifetime annuities below. We have a separate article on the pros and cons of fixed term annuities.
Annuity pros and cons
| Annuity pros | Annuity cons |
| You can choose between different annuity benefits and providers | Once you’ve made your choices and set up your annuity, you can’t make any changes to it |
| An annuity gives you a guaranteed income until you die | If you die sooner than expected, you might pay more for your annuity than you get out of it |
| Annuity rates* have gone up 30% in the last two years, making them more attractive | Annuity rates vary between providers, so make sure you shop around before buying |
| Annuities are a reliable, well-established type of product | Other ways of spending your pension pot - like drawdown - might give you more income. This will depend on investment markets |
*Based on our average annuity rates at April 2024 for ages 65-80 with a £40K pension pot, 5 year guarantee period and 50% dependant’s pension.
How much does an annuity cost?
Understanding what kind of retirement income you could get for your pension pot is an important part of retirement planning. We look at what you could get for your pot.
What happens to an annuity when you die?
When you die, annuities usually just stop paying out. But when you’re setting up your annuity you might be able to ask your provider to make other arrangements. After you die, they could:
- Switch some or all of your payments to a loved one
- Pay out a lump sum to them
To find out more, check out our What happens to annuities when you die article.
What should I do next?
This article is very much a starter for ten. To dig deeper, you can:
- Find out how much our products could pay you with our Annuity Calculator
- Get quotes from across the whole market at our AnnuityReady site
- Get free guidance at the Government’s Pension Wise site
- Find an independent financial adviser at the Unbiased site
- We also offer a Retirement Advice service
FAQs
Do you pay tax on annuity income?
HMRC treats any annuity income you receive as part of your taxable income, which also includes your State Pension. Any money you get above your personal allowance is taxable. The amount of tax you pay will depend on your personal circumstances and may change in the future.
What are the different types of annuities?
People often talk about annuities meaning just a lifetime annuity. In fact, you can choose between many different types of annuity. Each has its own specific benefits – the full list is:
- Lifetime annuities
- Fixed term annuities
- Joint lifetime annuities
- Enhanced annuities
- Deferred annuities
- Variable annuities
- Immediate needs annuities
- Purchased life annuities
We talk through them all in detail in our Types of annuity article.
What is the difference between a pension and an annuity?
A pension is a tax-efficient way of investing for your retirement, often with the help of your employer or the government. As you invest in your pension you build up your pension pot.
When the time comes to retire, you can spend some or all of your pension pot on an annuity. An annuity gives you a guaranteed income for the rest of your life or for a fixed period.
To find out more about annuities, take a look at our How annuities work article.
Which is better – annuity or drawdown?
As with any financial decision, it depends on your goals and circumstances. For an in-depth comparison of the two types of product, check out our Annuity vs drawdown article.
